F Wall Street Posts

Value Investing vs. Value Pretending

Joe Ponzio — Sat, 16 Aug 2008 01:14:58 -0600

For more than fifty years, great "value" investors — Warren Buffett, Benjamin Graham, Charlie Munger, Seth Klarman, to name a few — have been touting the benefits of investing when there is blood in the streets, buying businesses when they are on sale. At each turn, somebody would ask them: Aren't you concerned that, by constantly talking about how you became so successful, you'll create a following that will, in turn, increase competition and reduce your potential investment returns?

It is said that value investing is more popular today than ever before. I tend to disagree.

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F Wall Street Investment Performance

Joe Ponzio — Sat, 09 Aug 2008 17:21:56 -0600

It is just over a year since F Wall Street began on June 25, 2007. I first posted about the Blackstone (BX) IPO — a cautionary post warning visitors that excitement + lack of information = thanks, but no thanks. As many visitors know, my style is hardly predicated on activity. In fact, I'm more of a Charlie Munger assiduity-type investor — sit on your ass until a no-brainer comes along.

In this "rough and turbulent" market, let's take a look at the first year's success and overall performance.

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Phil Fisher on Profit Margins, Part II

Joe Ponzio — Sun, 20 Jul 2008 07:00:39 -0600

As I mentioned in this post, three of Phil Fisher's 15 Points to Look For in a Common Stock are directly related to profit margins. Companies with slim profit margins often feel tough economic or business cycles more vehemently than those with fat margins. Of course, there is a flip side to that coin: When coming out of tough times, companies with thin profit margins tend to rebound much more than those with fat margins.

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Free Cash Flow vs. Owner Earnings

Joe Ponzio — Mon, 14 Jul 2008 10:27:49 -0600

At the end of this post, you'll find a "Buy Now" button to purchase a 20-page report comparing Free Cash Flow to Warren Buffett's owner earnings. Though the two terms (free cash flow and owner earnings) are often used interchangeably, they are not always the same. Confusing the two can have a dramatic effect on your intrinsic value calculations.

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Value Investing vs. Business Investing

Joe Ponzio — Thu, 10 Jul 2008 20:26:18 -0600

In his 1934 book Security Analysis, Benjamin Graham laid out the definition for investing versus speculating. In the 74 years since he and David Dodd penned the book, nothing in the definition has changed. That said, BPal asked a very interesting question. I answered it in the comments, but I figured I should post about it as well.

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Predicting The Future of a Troubled Business

Joe Ponzio — Wed, 02 Jul 2008 21:53:06 -0600

A visitor just sent this email to me and I figured (as per his last line) that it would be better suited in a post rather than in a private email response. The question: Should I use the owner's margin on lowered sales as I project the intrinsic value of a company rather than sticking with historical growth and projections?

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What You Should Be Looking For

Joe Ponzio — Wed, 02 Jul 2008 17:36:00 -0600

Folks — as you can imagine, I have been busy ripping through annual reports and financial statements like crazy. Hence the irregularity to my posting. Back in October of last year, I had a lot of time on my hands — the effects of a high market and few opportunities. That situation has reversed.

What am I looking for? The economy has been putting a squeeze on a lot of companies, slamming profit margins, revenues and earnings. When this happens, companies have to start shedding assets — human and physical — in an effort to return to normal levels of profitability. When profit margins are thin, the business' are at risk (think GM, Blockbuster). When profit margins are fat under normal conditions, the business is sound, even if it takes a substantial hit to sales.

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Phil Fisher on Profit Margins

Joe Ponzio — Tue, 24 Jun 2008 11:58:09 -0600

Phil Fisher laid out fifteen points to look for in a common stock; three of them are directly related to profit margins. Calculated as net income divided by revenue, the profit margin is a quick way to determine which companies in an industry are most efficient (i) relative to the competition, and (ii) as a whole.

Does the company have a worthwhile profit margin?

To hammer the importance of this point home, you need not look further than traditional auto manufacturers.

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But Can They Sell It?

Joe Ponzio — Tue, 24 Jun 2008 00:04:12 -0600

You've heard the clichés: He could sell ice to an Eskimo. She could sell a ketchup popsicle to a woman in white gloves. The sales force is the lifeblood of an organization. After all, the best product in the world is worthless if nobody knows about it. And so, we move on to Phil Fisher's fourth point:

Does the company have an above-average sales organization?

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What/'/s Happening with Research and Development?

Joe Ponzio — Sun, 22 Jun 2008 14:08:31 -0600

Today's research and development (R&D) is tomorrow's new product or process. The other day we (or more specifically, Phil Fisher) asked, "Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?"

The goal of R&D is to produce new products, services, or processes that will "still further increase total sales potentials" for the company. Not an easy question to answer, Fisher asks:

How effective are the company's research and development efforts in relation to its size?

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Will They Seek Out More Profitable Lines?

Joe Ponzio — Wed, 18 Jun 2008 21:32:33 -0600

Businesses generally expand in three ways — increased sales of existing products, sales (and increased sales) of new products, and acquisitions to expand product lines. We looked at "increased sales of existing products" in Can They Increase Sales For Several Years? Fisher then went on to talk about "sales (and increased sales) of new products":

Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

There are two schools of thought on this subject — the rational, business-like approach and the "other" approach.

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Essays of Warren Buffett

Joe Ponzio — Thu, 12 Jun 2008 09:23:46 -0600

Back in April, Lawrence Cunningham, editor of The Essays of Warren Buffett, emailed me to tell me about the (then) upcoming release of the second edition of the book. (We all know what a nightmare April and May were for me. Sorry, Larry, for the delay.) In this new edition, Cunningham preserves the same structure, but addresses new topics like derivatives, currencies, and huge investments like Equitas.

Here is the Amazon description:

The definitive work concerning Warren Buffett and intelligent investment philosophy, this is a collection of Buffett's letters to the shareholders of Berkshire Hathaway written over the past few decades that together furnish an enormously valuable informal education. The letters distill in plain words all the basic principles of sound business practices. They are arranged and introduced by a leading apostle of the "value" school and noted scholar, Lawrence Cunningham.

What's new in the second edition? This new edition has extensive additional content that highlights topics of vital national or international significance, including:

the proliferation of stock option compensation and excessive CEO pay;
Berkshire's shareholder-designated contribution program and the controversy over the abortion issue that led to its termination;
the explosion of derivative financial instruments and related perils and how Berkshire dealt with managing a sizable portfolio of them after buying Gen Re;
the dramatic increase in foreign currency trading in the past five years along with the astonishing growth in the US trade deficit;
management succession at Berkshire Hathaway as Mr. Buffett ages;
commentary on his philanthropic thinking in giving his entire fortune to charities; and
the fairness and other matters concerning taxation of corporations.

Here in one place are the priceless pearls of business and investment wisdom, woven into a delightful narrative on the major topics concerning both managers and investors. These timeless lessons are useful to members of a wide range of professions, including law, accounting, finance and management, and provide rich teaching materials for courses in those fields.

Back in November of 2007, I said that Cunningham's original book was a must read (in lieu of reading all of Buffett's annual letters on your own). I just ordered my copy of the second edition, but I already know it's good. After all, it's Buffett and Cunningham. How can you go wrong?

You can get it at Amazon.com.

Can They Increase Sales For Several Years?

Joe Ponzio — Wed, 11 Jun 2008 12:02:16 -0600

In Common Stocks and Uncommon Profits, Phil Fisher outlined fifteen points to look for when analyzing a company for purchase. When valuing a business, our job is to try and predict the future with a degree of accuracy and confidence. If it were as easy as plugging the financials into a spreadsheet, everyone would achieve consistent, double-digit returns.

Unfortunately, the future is more than a simple mathematical equation. Enter Phil Fisher.

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Patience and Performance

Joe Ponzio — Wed, 04 Jun 2008 11:05:32 -0600

When you buy stock in a company, how long do you plan on holding it? Forever. Ideally, yes. But we live in the real world — a world of wildly fluctuating stock prices that often turns otherwise sane investors into panicky, self-doubting lemmings. As stock prices drop...lower...lower...people tend to second-guess their decisions and sell precisely when they should be buying.

[W]hile I realized thoroughly that if I were to make the kinds of profits that are made possible by the process that I have described as zigging when the rest zags, it was vital that I have some sort of quantitative check to be sure that I was right in zigging. With this in mind, I established what I called my three-year rule. — Philip Fisher, Common Stocks and Uncommon Profits

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Do As I Say, Not As I Do

Joe Ponzio — Thu, 29 May 2008 17:31:45 -0600

On October 15, 2007, I took a look at Nutrisystem (NTRI) about two weeks after a 25% drop. Running a fairly conservative analysis (in my opinion), I pegged the company as a $38 or so company. Add in a little uncertainty and a 50% margin of safety, and I said I'd consider investing under $19.50 a share.

Then, it fell off my radar.

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